This is a weird post to read. Clearly, we see that both the deposit rate and the 3 month treasury pretty closely track the fed funds rate. And we all understand that the rate on the ten year treasury is such that it is expected to deliver the same return as repeatedly reinvesting in short-term treasuries for 10 years, plus some bonus amount that reflects the risk associated with locking your money up at a fixed rate for 10 years in a very variable world.
So it would seem the question that remains is whether those short term, treasuries are being based on the fed funds rate or vice versa. Simply doing a statistical analysis of the 3 month treasury (why use 3 month rather than 1 month?) versus the fed funds rate and concluding the 3 month is leading is incredibly flawed - first of all, the market is forward looking. Even if the fed funds rate was the only factor in the yield on the 3 month, they'd still not perfectly align - the market would estimate where fed funds is going in the next 3 months, and price the 3 month based on the average. Second, there are a bunch of other market factors going into the treasury rate, many of which are related to the fed funds rate (such as liquidity in various areas, inflows and outflows), making a simple statistical analysis invalid. Okay, that's a bunch of words, what about evidence?
Click here, set it to 10 years, and add the 1 month in. That relationship is undeniable - you can see the 1 month yield doing a little jump every time the fed funds rate changes. That's not happening because of market forces unrelated to the fed which just happen to coincide with every FOMC meeting. The 1 month is following the fed funds rate.
If you accept the 1 month follows fed funds, the 3 month is based on expectations about the 1 month, and so on up to the 10 year and the 30 year, and the 30 year mortgage rate is going to be based on the 30 year treasury plus some credit risk spread, then yes, mortgage rates do follow the fed funds rate. In effect, the x-year mortgage follows the expectations of the next x years' fed funds rates. It's far from direct - credit risk and liquidity are both relevant factors; and of course the fed rate is based on a slew of macroeconomic expectations - but suggesting the fed doesn't even influence rates, and just follows market rates, seems bizarre.
and your take on Q.E ever since the GFC, suppressing long term rates and putting a backstop on equity markets?
This is a weird post to read. Clearly, we see that both the deposit rate and the 3 month treasury pretty closely track the fed funds rate. And we all understand that the rate on the ten year treasury is such that it is expected to deliver the same return as repeatedly reinvesting in short-term treasuries for 10 years, plus some bonus amount that reflects the risk associated with locking your money up at a fixed rate for 10 years in a very variable world.
So it would seem the question that remains is whether those short term, treasuries are being based on the fed funds rate or vice versa. Simply doing a statistical analysis of the 3 month treasury (why use 3 month rather than 1 month?) versus the fed funds rate and concluding the 3 month is leading is incredibly flawed - first of all, the market is forward looking. Even if the fed funds rate was the only factor in the yield on the 3 month, they'd still not perfectly align - the market would estimate where fed funds is going in the next 3 months, and price the 3 month based on the average. Second, there are a bunch of other market factors going into the treasury rate, many of which are related to the fed funds rate (such as liquidity in various areas, inflows and outflows), making a simple statistical analysis invalid. Okay, that's a bunch of words, what about evidence?
https://tradingeconomics.com/united-states/interest-rate#
Click here, set it to 10 years, and add the 1 month in. That relationship is undeniable - you can see the 1 month yield doing a little jump every time the fed funds rate changes. That's not happening because of market forces unrelated to the fed which just happen to coincide with every FOMC meeting. The 1 month is following the fed funds rate.
If you accept the 1 month follows fed funds, the 3 month is based on expectations about the 1 month, and so on up to the 10 year and the 30 year, and the 30 year mortgage rate is going to be based on the 30 year treasury plus some credit risk spread, then yes, mortgage rates do follow the fed funds rate. In effect, the x-year mortgage follows the expectations of the next x years' fed funds rates. It's far from direct - credit risk and liquidity are both relevant factors; and of course the fed rate is based on a slew of macroeconomic expectations - but suggesting the fed doesn't even influence rates, and just follows market rates, seems bizarre.